Corporate Defaults 'Could Hit 10%' as the Credit Crisis Worsens

Nothing has changed. The fundamentals continue to deteriorate in the US financial system and economy. What this headline implies is that ten percent of US businesses could become bankrupt in the next year or so. Think about that.

So why is the dollar strengthening and the stock market rising? For two reasons.

First, as the fog of war descends on the Caucasus, so too the fog of government meddling if not outright intervention has been descending on the financial markets. It would take a leap of faux faith to believe that Georgia launched their assault, timed with the opening of the Olympics, without informing the US which is supplying logistical support and military advisors. Cheney has shown rare personal involvement as well. At the least we are sure that there is more to this than meets the eye.

Secondly, a significant amount of liquidity has been arriving at the NY Fed's custodial accounts, coming from Japan and other foreign central banks, which explains much of the short term financial markets action during the thinly traded late summer months.

Nothing has changed. Things continue to worsen in the real economy. We will look for the markets to reflect the underlying trends again soon enough.


Corporate debt default ‘could hit 10%’
By Nicole Bullock
The Financial Times
August 8 2008 01:28

Defaults on corporate debt are ratcheting up as economic weakness takes it toll on the financial health of companies.

The global default rate is expected to climb to 6.3 per cent over the next 12 months and it could reach 10 per cent should the US sink into a protracted recession, Moody’s Investors Service said on Thursday.

“The storm is gathering for default rates moving up,” said Kenneth Emery, Moody’s director of corporate default research.

Fellow rating agency Standard & Poor’s also warns that credit conditions are deteriorating. “We have long been proponents of the view that the credit euphoria of the prior boom years beginning with 2003 would necessitate a shake-out and purge,” S&P said in a recent report.

“This would result in substantially higher downgrades and defaults, concentrated in the US, but not without repercussions in other parts of the world.”

A year into the credit crunch, defaults have begun to move higher, but they still remain well below the levels reached in other economic downturns. Moody’s default rate hit 10.4 per cent in 2002 and the all-time peak was 11.9 per cent in 1991.

In July, the speculative-grade default rate rose to 2.5 per cent from a revised level of 2.1 per cent in June, marking the largest monthly increase since the default rate bottomed at 0.9 per cent in November 2007, Moody’s said. A year ago, the global speculative-grade default rate stood at 1.5 per cent.

“Certainly, this year the lack of issuers with debt coming due and the prevalence of covenant-lite deals have helped to keep a lid on defaults,” Mr Emery said. “As we move through this year and 2009 that lid will be removed.”

In the past few years of easy lending, issuers refinanced debt and obtained so-called covenant-lite deals, which do not include traditional default triggers that safeguard lenders.

In the US, the consumer transportation companies, primarily airlines, will have the highest defaults, Moody’s expects, while in Europe durable consumer goods companies will be the most troubled.